German taxpayers don't wish to be cannon fodder for debts

If bondholders are not forced to take haircuts on loans to the 'Pigs', then Germany's role will be lender of last resort

From left to right, Italy's Prime Minister Silvio Berlusconi, Taoiseach Brian Cowen, Greek Prime Minister George Papandreou and German Chancellor Angela Merkel share a word during an EU summit in Brussels on December 16. Disagreement over how to fight Europe's debt crisis deepened at a two-day summit of European leaders, as violent protests and uncertainty have fuelled investors concerns. Photo: AP

These are testing times for European taxpayers, especially German ones. The European stabilisation package, worth as much as €750bn, already meant a huge burden on ordinary people when it was set up in May 2010.

These are testing times for European taxpayers, especially German ones. The European stabilisation package, worth as much as €750bn, already meant a huge burden on ordinary people when it was set up in May 2010.

But at that time we were still told that such a protective shield would suffice to fend off speculators around the world.

It hasn't worked. A few weeks ago, European leaders agreed to grant Greece much more time to pay back its emergency loans.

And on November 21, a pressured Irish Government decided to tap the stabilisation package.

For German taxpayers, that must have felt like a 'black Sunday'. Other nations are about to follow the Greek and Irish examples. So it comes as no surprise that there has been talk of enlarging the stabilisation package, possibly to an unlimited amount.

What does that mean for Germany? We are on the brink of a transfer union, where huge amounts of money are channelled from richer to poorer countries.

And Ireland isn't even poorer than Germany. According to the International Monetary Fund, Ireland's gross domestic product per capita is about €35,000, higher than Germany's €31,000. Taking purchasing power into account doesn't change anything.

Nevertheless, a €62.7bn aid package for Ireland was set up, of which Germany is the single biggest guarantor. The IMF contributes €22.5bn, of which Germany provides about €1.3bn.

The European Financial Stabilisation Mechanism pledges €22.5bn -- the German share is about €5bn.

The European Financial Stability Facility provides €17.7bn, of which Germany gives about €6.2bn.

So, German taxpayers will guarantee the repayment of about €12.5bn lent to Ireland.

The question, therefore, is whether Ireland will ever be in a position to fully repay these loans. The aid package of €62.7bn amounts to a staggering 40pc of Irish GDP.

It is true that the Irish Government has already taken substantial measures to curb the budget deficit. The reductions in public-service salaries of as much as 15pc are impressive examples of such austerity. But that alone certainly won't do the job.

The Irish problem is mainly bloated banking and construction industries. Here, a painful downsizing and realignment is necessary.

The Irish boom -- especially in real estate -- was unsustainable. Prices probably need to come down further. The losses inflicted by that must not be put on the shoulders of taxpayers.

Ever since the financial crisis began, German taxpayers have urged the government not to let lenders off the hook.

During the boom, we saw huge profits in private industry, welcomed and fostered by governments. More and more people thought they could get rich by selling each other real estate.

German taxpayers weren't part of that game, so they shouldn't have to bear the brunt of bad investments. Private losses shouldn't be socialised.

When the discussions on assistance to Ireland started, German Chancellor Angela Merkel explicitly demanded a contribution from private lenders.

So it was an immense disappointment for German taxpayers that the government didn't succeed in that direction during negotiations on the aid package.

What finally was presented was an agreement on the backs of taxpayers while banks, insurance companies and investment funds got off lightly.

German taxpayers won't tolerate that. Private lenders must make contributions that range from lower interest rates and later maturities to accepting 'haircuts' -- losses from their holdings of government bonds. It isn't the duty of taxpayers to protect financial institutions from write-offs.

If the 'Irish problem' endangers German banks or insurance companies -- when asked individually, they deny it -- then the German government can act accordingly.

But market principles, which are at the root of our well-being, need to be re-established. Whoever takes potentially enriching risks should also be required to bear the losses.

The protective shield hasn't contained the sovereign-debt crisis, which is likely to spread to other countries.

So Germany runs the risk of becoming the lender nation of last resort. Who will finally bail out Germany? The European Central Bank? Its policy of buying Greek and Irish bonds is already alarming. So far, German taxpayers have only seen costly compromises on aid-package deals.

When Jean-Claude Trichet steps down as ECB president next year, the appointment of a German candidate as his successor would be good news.

That would give some reassurance to taxpayers that the debt crisis won't be 'solved' by massive inflation.

Anything else will only test the tolerance of German taxpayers. (Bloomberg)